Interested in becoming a better crypto trader and investor? Well, you’re in luck because we've got some game-changing tips for you. Risk management is a critical part of every successful trader and investor's playbook. However, this crucial aspect of trading is often overlooked by beginners. Don't fall into the same trap of thinking that playing it safe is enough to mitigate risks. In this article, we'll explore five proven risk management strategies that can help you navigate the volatile crypto market with ease.

Why is Risk Management Important in Crypto? 

Before we dive into the strategies, let's talk about why risk management is important in the first place. 

It’s no secret that crypto markets can be highly volatile. This nascent asset class is still in its price discovery phase, and large price movements can happen rapidly and unpredictably. This means that trading and investing in crypto comes with high risk, as well as the potential for high rewards.  

With volatility so prevalent, it’s extremely important to employ sound risk management practices and strategies to mitigate risk. 

Strategy #1: The 1% Rule

One of the most basic principles of trading risk management is the 1% rule. This simple strategy entails never risking more than 1% of your total capital on any single trade or investment. 

For example, if you have $10,000 to invest, there are different ways to adhere to the 1% rule. You could simply purchase $100 of Bitcoin (BTC). If the price were to drop to zero, you would only lose a maximum of 1% of your total capital. Alternatively, you could purchase $10,000 worth of Bitcoin (BTC) and set a stop-loss at $9,900, to cut your losses at 1% of your total investment capital ($100).  

The 1% rule doesn't affect the size of your investments but the amount you are willing to risk on an investment. The 1% rule helps to ensure that you don't lose your entire investment on a single trade, and it also helps to manage your emotions. When you're only risking a small percentage of your investment on each trade, you're less likely to make emotional decisions that could lead to bigger losses.

Strategy #2: Set Stop-loss and Take-profit Points

Setting stop-loss and take-profit points is another essential aspect of risk management.

A stop-loss is a predetermined price at which you will sell your crypto if the price falls below a certain point. For example, if you bought $10,000 of BTC, and you set a stop-loss at $9,900, your position will get sold if the BTC price drops too or below $9,000. This helps to limit your losses if the price of BTC starts to decline.

A take-profit point, on the other hand, is a predetermined price at which you will sell your crypto if the price rises above a certain point. For example, if you bought $10,000 of BTC, and you set a take-profit at $10,500, your position will close if the BTC price rises to or above $10,500. This helps to lock in profits and prevent you from holding onto a crypto for too long and potentially losing gains. 

These conditional order types are an important tool for helping manage your risk. They can be set up in advance and will execute automatically once market conditions are met. This approach can help you eliminate emotional trading and avoid impulsive decisions.

Recommended Reading: Trading Basics: Understanding Trade Order Types

Strategy #3: Diversification

Diversifying your portfolio is one of the most popular methods for reducing your investment risk. By investing in a variety of different cryptocurrencies, you can spread your risk and minimise the impact of any single crypto's price movements on your portfolio. 

In other words, not putting all your eggs in one basket can help mitigate single point of failure risk. A diverse crypto portfolio could consist of different types of crypto assets, across different sectors or protocols, and with different risk profiles. 

For beginner investors, diversified portfolios tend to give greater balance and less volatility compared to concentrated portfolios.

Strategy #4: Exit Strategies

Fail to prepare, prepare to fail.

One of the biggest mistakes that new crypto traders make is not having an exit strategy in place. An exit strategy is a predetermined plan for when you will sell your assets and exit the market. Having an exit strategy in place helps to prevent emotional decision-making and ensures that you're prepared for any market conditions.  

Exit strategies should take into account factors such as market trends, price movements, and your personal financial goals. By sticking to the plan, you can take profits or cut losses at a predetermined point, rather than letting your emotions take control. 

One of the best ways to implement an exit strategy is by using conditional orders. As we’ve already discussed, stop-loss and take-profits play an essential role in a trader’s toolkit and can help you make advanced trading decisions. 

Recommended Reading: Crypto Market Volatility Explained

Strategy #5: Do Your Own Research (DYOR)

Whether you’re placing your first investment or building out an entire portfolio, it all starts with one thing: research.

Do your own research, or DYOR, as popularized by crypto enthusiasts, is a common phrase used in crypto investing and trading. The idea behind this term is to reduce the number of uninformed investors by encouraging users not to follow the word of others blindly. Any new projects or areas of interest should be subject to a significant amount of research before being considered for investment.

Before investing in any asset, you should do your due diligence. This could include reviewing project information such as its white paper, tokenomics, partnerships, roadmap, community, team members and much more. 

By staying up to date and doing your own research, you'll be better equipped to make informed decisions and minimise your risk.

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